Savings Accounts May Make You Lose Money?

Being savvy with money is a challenge. This isn’t breaking news – people have been coming up with creative solutions to money problems since money first came into being over 10,000 years ago in the form of livestock and obsidian. From ancient piggy banks modeled on beehives to tally sticks in Great Britain that predated credit cards, savings has always been a clear concern.

Saving Money While Being Savvy

The challenges of not having enough money are clear – unpaid bills, mounting debt, obligatory thrift. But even when you’re on top of your bills, debt-free, and saving money, you can still get burned. That last item, saving money, is certainly one of the most unassailably sound financial principles you could follow, but the way you approach saving could mean the difference between a secure financial future and losing money.

Savings accounts are a good idea. While cash in hand is easy to spend, parking funds in an FDIC-insured savings account keeps it safe while accruing interest. Building up a cash reserve is the perfect way to prepare for spendier purchases. Instead of taking on more credit debt, you can pay large credit card purchases off right away, boosting your credit score in the process.

The thing is, your savings account is losing money.

Savings and Losses

To know why, you need to understand how economic forces affect your money over time. While your savings accrue interest, the economy is inflating or deflating at a variable rate. In other words, interest boosts your balance, but the purchasing power of your cash fluctuates. To truly save money over time, your interest rate needs to be higher that the current rate of inflation.

Let’s look at how that works with savings accounts. In April 2016, the average interest rate for savings accounts in the U.S. was 0.06%, meaning that over the course of the year, every $100 in your account turned into $106. In other words, for every $1,000 in your savings account, the interest on your account to pay for say, drinks for you and three friends at the next concert you attend. That’s good, right? Well, no.

In April 2016, the inflation rate was 1.16%, meaning that, at the average 0.06% APY, your savings actually lost purchasing power. The average rate of inflation in 2016 through September was 1.08%, so even with the high-yield savings account with the highest yield of 1.1% APY, you’re just barely breaking even. It could be worse (it’s hard to imagine any interest rate beating Venezuela’s current 57.3% rate of inflation) but it could also be better if you move your balance to a CD, or invest in mutual or index funds.

The I Will Teach You To Be Rich Blog tells us more and offers suggestions on smarter places to put your money.